Contrary to its repeated claims about the state's fiscal position, the fund-starved Punjab government has conceded before the 14th Finance Commission that the "food basket" of the country is in the grip of a "vicious cycle of debt" with mounting debt raising serious questions about debt
sustainability.

The outstanding debt of the state, which was Rs. 10,009 crore in 1980-81, has risen to a whopping Rs. 96,518 crore in 2012-13. And, it is set to reach Rs. 1,02,282 crore in 2013-14, according to the 166-page memorandum submitted by the state to the commission last week.

This official stance of the state government before the Finance Commission is at variance with "all is well" and rosy picture of financial health being painted publicly by deputy chief minister Sukhbir Singh Badal in face of the opposition onslaught.

The commission headed by YV Reddy was in Chandigarh last week on a two-day visit, and held a series of meetings with the state government and key stakeholders to review the state of finances and demands.

It is expected to finalise its recommendations by October after completing discussions with all the state governments and the Centre. The government stated that the debt burden continued to choke resources from development spending and that there was urgency to address it before it "becomes completely unsustainable".

The memorandum, of which HT has a copy, says, "The state is in a kind of vicious cycle of debt where it is borrowing to service the debt obligations. Such high level of debt raises serious questions about debt sustainability in the medium term."

While accepting that Punjab is among the states with the highest debt-GSDP ratio, the SAD-BJP government told the commission that the outstanding debt as percentage of revenue receipts is close to 300%. Interest payment as percentage of revenue receipts is more than 20% and 90% of the borrowings were used for debt servicing, leaving only 10% for development. "All these indicators highlight that Punjab is under debt stress situation," the government has stated.

Though Punjab has been able to reduce outstanding debt to GSDP ratio in the last decade, it remains significantly higher than other general category states. The debt servicing in 2012-13 was of Rs. 10,505 crore (interest Rs. 6,916 crore and repayment of principal Rs. 3,589 crore).

Revenue deficit

The Punjab government told the commission of its inability to contain the revenue deficit - the difference between revenue expenditure and revenue receipts - as per the target set by the 13th Finance Commission. "We believe that bringing down the revenue deficit to 0% in 2014-15 from 2.33% in 2010-11 is difficult keeping in view the economic structure of Punjab," the memorandum says. The revenue deficit target, the government stated, was yet to be met due to high interest payment and rise in salary and pension bills.

Further accepting that the government was going through a challenging phase to meet the demand of various citizen-centric services, the government pointed out that it had been finding it difficult to meet the fiscal targets set by the previous finance commission.

Capital assets

In another startling revelation, the government also talked about its constraints in development spending due to committed liabilities such as salaries, pensions and interest repayment, stating that the capital outlay constituted only 3.7% of its total expenditure in 2011-12.

"This is posing significant development risks to the state of Punjab. High, committed expenditure leaves insufficient funds for creation of capital assets," as per the official document of the government. Less capital outlay, according to the government, is posing significant developmental challenges to the state.

Though Punjab has been able to reduce the debt to GSDP ratio and interest to revenue receipts in the last decade, these remain higher than the safe threshold limits. Besides, own non-tax revenue from lotteries, user charges from general services, etc, constituted nearly 36% of revenue receipts of the state government in 2002-03. This has gone down to 5.3% in 2011-12.